Theories Of International Trade

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• Mercantilism theory.
• Absolute Cost Advantage.
• Comparative Cost Advantage.
• Heckscher-Ohlin Model.
• Product Life Cycle Theory.
• New Trade Theory.

Mercantilism theory

• Mercantilism was an economic theory prevalent in the 16th to 18th centuries. It emphasized the accumulation of wealth through trade surpluses and the belief that a country's economic strength depended on its ability to export more than it imported. Mercantilists advocated for protectionist policies such as tariffs and subsidies to promote domestic industries and maintain favorable trade balances
• A country should accumulate wealth in form of Gold and Silver and other precious stones.

Absolute Advantage

• The theory of absolute advantage, proposed by Adam Smith, suggests that countries should specialize in producing goods or services in which they have an absolute advantage, meaning they can produce them more efficiently than other countries. By focusing on their strengths and trading with other countries, both nations can benefit from the exchange

Comparative Advantage

• Developed by David Ricardo, the theory of comparative advantage argues that countries should specialize in producing goods or services in which they have a lower opportunity cost, rather than focusing on absolute advantage. By specializing and trading based on comparative advantage, countries can maximize their overall productivity and achieve higher levels of efficiency

Heckscher-Ohlin Model

• The Heckscher-Ohlin model, also known as the factor proportions theory, explores the relationship between the availability of factors of production (land, labor, capital) and trade patterns. It suggests that countries will specialize in and export goods that use their abundant factors of production and import goods that require their scarce factors. For example, a labor-abundant country would export labor-intensive goods and import capital-intensive goods

Product Life Cycle Theory

• Proposed by Raymond Vernon, the product life cycle theory argues that the pattern of international trade is influenced by the life cycle of a product. Initially, a new product is developed and predominantly produced in the country where it was invented. As the product matures and demand stabilizes, production expands to other countries to take advantage of lower costs. Eventually, the product may be imported back into the country where it was originally developed.

New Trade Theory

• The new trade theory focuses on economies of scale and product differentiation as determinants of international trade. It suggests that firms that can achieve economies of scale by producing at large volumes or have differentiated products can capture a larger market share and compete internationally.

These theories provide insights into the reasons behind international trade patterns and help explain the benefits of trade for countries involved. However, it's important to note that real-world trade is influenced by a combination of factors, including government policies, market conditions, technology, and geopolitical considerations.

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